S CORPORATION HEALTH INSURANCE: SHOULD YOU BOTHER WITH THE PAPERWORK?

June 11, 2008

For the 2007 tax return 1040 with a subchapter s corporation (husband/wife) our 27-year accountant listed health care premiums on line 29 of the 1040. I've advised him of the 2008-1 requirements from your website that the premiums need to go through the payroll and appear on the W-2, Box 1. He states this is easier and we get the deduction anyway, why put us through that hassle! Is he right?

In order for the 2-percent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee’s Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040, U.S. Individual Income Tax Return.

While it isn't 100% clear that the IRS would win if pushed in court, it is clear what they say you "must" do - have the S corporation pay or reimburse the amount with after-tax dollars. The notice doesn't say "you can ignore this and get the deduction anyway." If you fail to follow the instructions in Notice 2008-1 and an agent finds it, you can be confident that she will write it up. Then you have to waste time and money fighting, and you might lose anyway, so you lose either way, even if you ultimately get the deduction.

While it is a minor hassle to follow the rules, it's very minor, especially if you don't have to do it retroactively. In the long run, it's a lot easier than fighting it on an exam.